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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
_____________________
Commission File Number 1-12833
TXU Corp.
A Texas Corporation I.R.S. Employer Identification
No. 75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
_____________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Common Stock outstanding at May 7, 2001: 256,886,397 shares, without par value.
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TABLE OF CONTENTS
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Part I. Financial information Page
----
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three Months Ended March 31, 2001 and 2000......................................................... 3
Condensed Statements of Consolidated Comprehensive Income (Loss) -
Three Months Ended March 31, 2001 and 2000......................................................... 4
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2001 and 2000......................................................... 5
Condensed Consolidated Balance Sheets -
March 31, 2001 and December 31, 2000............................................................... 6
Notes to Financial Statements...................................................................... 7
Independent Accountants' Report.................................................................... 20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 29
Part II. Other Information
Item 1. Legal Proceedings.................................................................................. 30
Item 6. Exhibits and Reports on Form 8-K................................................................... 30
Signature.................................................................................................... 31
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
March 31,
------------------
2001 2000
---- ----
Millions of Dollars,
Except per Share Amounts
Operating revenues.................................................................................... $8,375 $4,776
------ ------
Operating expenses
Energy purchased for resale and fuel consumed.................................................... 6,392 2,896
Operation and maintenance........................................................................ 819 785
Depreciation and other amortization.............................................................. 257 264
Goodwill amortization............................................................................ 55 49
Taxes other than income.......................................................................... 182 160
------ ------
Total operating expenses................................................................... 7,705 4,154
------ ------
Operating income...................................................................................... 670 622
Other income (deductions) -- net...................................................................... (3) 12
------ ------
Income before interest, other charges and income taxes................................................ 667 634
------ ------
Interest income....................................................................................... 28 36
Interest expense and other charges
Interest......................................................................................... 372 360
Distributions on mandatorily redeemable, preferred
securities of subsidiary trusts, each holding solely junior
subordinated debentures of the obligated company:
TXU obligated.......................................................................... 8 7
Subsidiary obligated................................................................... 19 20
Preferred stock dividends of subsidiaries........................................................ 3 4
Distributions on preferred securities of subsidiary perpetual
trust of TXU Europe.......................................................................... 4 1
Allowance for borrowed funds used during
construction and capitalized interest........................................................ (5) (2)
------ ------
Total interest expense and other charges................................................... 401 390
------ ------
Income before income taxes............................................................................ 294 280
Income tax expense.................................................................................... 93 87
------ ------
Net income............................................................................................ 201 193
Preference stock dividends............................................................................ 5 --
------ ------
Net income available for common stock................................................................. $ 196 $ 193
====== ======
Average shares of common stock outstanding (millions)................................................. 257 272
Per share of common stock:
Basic earnings................................................................................... $0.76 $0.71
Diluted earnings................................................................................. $0.76 $0.71
Dividends declared............................................................................... $0.60 $0.60
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended
March 31,
------------------
2001 2000
----- -----
Millions of Dollars
Net income........................................................................................ $ 201 $ 193
Other comprehensive income (loss) --
Net change during period, net of tax effects:
Foreign currency translation adjustments.................................................. (256) (78)
Unrealized holding gains on investments
classified as available for sale..................................................... 55 50
Gain realized on sale of available for sale securities included in
other income (deductions) -- net..................................................... (2) --
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001........................... (132) --
Net change in fair value of derivatives.......................................... (42) --
Amounts realized in earnings during the period................................... 6 --
----- -----
Total........................................................................... (371) (28)
----- -----
Comprehensive income (loss)....................................................................... $(170) $ 165
===== =====
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
---------------------
2001 2000
------ -----
Millions of Dollars
Cash flows - operating activities
Net income............................................................................................ $ 201 $ 193
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization..................................................................... 343 352
Deferred income taxes and investment tax credits - net........................................... 101 (48)
Gains from the sale of assets.................................................................... (9) (13)
Other............................................................................................. 33 (1)
Changes in operating assets and liabilities....................................................... (311) 154
------ -----
Cash provided by operating activities............................................... 358 637
------ -----
Cash flows - financing activities
Issuances of securities:
Long-term debt..................................................................................... 59 444
Preferred securities of subsidiary perpetual trust of TXU Europe................................... -- 150
Common stock....................................................................................... 4 --
Retirements/repurchases of securities:
Long-term debt/obligations......................................................................... (621) (622)
Common stock....................................................................................... -- (414)
Change in notes payable:
Commercial paper................................................................................... 209 196
Banks.............................................................................................. (26) (18)
Cash dividends paid:
Common stock....................................................................................... (154) (162)
Preference stock................................................................................... (6) --
Debt premium, discount, financing and reacquisition expenses........................................... (3) (11)
------ -----
Cash used in financing activities...................................................... (538) (437)
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Cash flows - investing activities
Capital expenditures................................................................................... (319) (277)
Acquisitions of businesses............................................................................. (217) --
Proceeds from sale of assets........................................................................... 141 382
Nuclear fuel........................................................................................... (11) --
Other.................................................................................................. (70) (31)
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Cash provided by (used in) investing activities........................................... (476) 74
------ -----
Effect of exchange rates on cash and cash equivalents...................................................... (18) (4)
------ -----
Net change in cash and cash equivalents.................................................................... (674) 270
Cash and cash equivalents - beginning balance.............................................................. 1,039 560
------ -----
Cash and cash equivalents - ending balance................................................................. $ 365 $ 830
====== =====
See Notes to Financial Statements.
5
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
2001 December 31,
(Unaudited) 2000
------------ ------------
ASSETS Millions of Dollars
Current assets:
Cash and cash equivalents................................................................ $ 365 $ 1,039
Accounts receivable...................................................................... 2,591 2,817
Inventories -- at average cost........................................................... 442 492
Merchant energy trading assets........................................................... 1,334 2,187
Other current assets..................................................................... 316 618
------- -------
Total current assets................................................................. 5,048 7,153
------- -------
Investments................................................................................ 3,003 3,005
Property, plant and equipment -- net....................................................... 23,031 23,301
Goodwill................................................................................... 7,196 7,508
Regulatory assets.......................................................................... 2,416 2,290
Merchant energy trading assets............................................................. 949 555
Derivative assets.......................................................................... 508 --
Deferred debits and other assets........................................................... 868 1,178
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Total assets......................................................................... $43,019 $44,990
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable:
Commercial paper....................................................................... $ 2,086 $ 1,906
Banks.................................................................................. 1,142 1,266
Long-term debt due currently............................................................ 3,110 2,894
Accounts payable........................................................................ 2,166 2,752
Merchant energy trading liabilities..................................................... 1,242 2,132
Other current liabilities............................................................... 1,660 1,849
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Total current liabilities............................................................ 11,406 12,799
------- -------
Accumulated deferred income taxes.......................................................... 3,946 3,963
Investment tax credits..................................................................... 496 501
Merchant energy trading liabilities........................................................ 924 369
Derivative liabilities..................................................................... 317 --
Other deferred credits and noncurrent liabilities.......................................... 2,042 2,406
Long-term debt, less amounts due currently................................................. 14,538 15,281
Mandatorily redeemable, preferred securities of subsidiary trusts, each holding solely
junior subordinated debentures of the obligated company:
TXU obligated......................................................................... 368 368
Subsidiary obligated.................................................................. 976 976
Preferred securities of subsidiary perpetual trust of TXU Europe........................... 150 150
Preferred stock of subsidiaries:
Not subject to mandatory redemption.................................................... 190 190
Subject to mandatory redemption........................................................ 21 21
Common stock repurchasable under equity forward contracts, at settlement value............. 146 190
Contingencies (Note 8)
Shareholders' equity (Note 5).............................................................. 7,499 7,776
------- -------
Total liabilities and shareholders' equity........................................... $43,019 $44,990
======= =======
See Notes to Financial Statements.
6
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Corp. (TXU), a Texas corporation, is a holding company whose principal
United States (US) operations are conducted through TXU Electric Company (TXU
Electric), TXU Gas Company (TXU Gas), TXU Energy Services Company and TXU Energy
Trading Company (TXU Energy Trading). TXU's principal international operations
are conducted through TXU International Holdings Limited (TXU International
Holdings), which in turn indirectly owns TXU Europe Limited (TXU Europe) and TXU
Australia Holdings (Partnership) Limited Partnership (TXU Australia).
TXU engages in the generation, purchase, transmission, distribution and sale
of electricity; the purchase, transmission, distribution and sale of natural
gas; and merchant energy trading, energy services, telecommunications, and other
businesses.
On January 8, 2001, TXU Europe completed the acquisition of 51% of Stadtwerke
Kiel AG (Kiel AG), a German municipal utility, for (Pounds)145 million ($217
million). The acquisition of Kiel AG was accounted for as a purchase business
combination. At the date of acquisition, Kiel AG had sterling equivalent assets
of (Pounds)121 million ($182 million) and liabilities of (Pounds)82 million
($123 million). The process of determining the fair value of assets and
liabilities of Kiel AG continues but is expected to be completed within one year
of the acquisition date. The preliminary estimate of goodwill is (Pounds)106
million ($150 million) which is being amortized over 40 years. This amount is
subject to further revision as additional information becomes available. The
results of operations of Kiel AG are reflected in the consolidated financial
statements from the January 8, 2001 acquisition date. Pro forma information for
the three months ended March 31, 2001 and 2000, reflecting the acquisition of
Kiel AG, would not be significantly different from reported amounts.
Under the terms of the purchase agreement, TXU Europe has the unilateral
right to make further capital investments in Kiel AG for specified business
development purposes and may, in the process, acquire additional shares, in a
new share offering that is made to all shareholders. If the City of Kiel
chooses not to participate in such an offering, its current holdings of 49% of
Kiel AG could be diluted down to a residual holding of 25.1%.
The purchase agreement further provides that if the holdings of the City of
Kiel exceed 25.1% on the later date of January 8, 2006 or five years after
participation by the City of Kiel in a new capital issue, the city may require
TXU Europe to purchase all, but not less than all, of those holdings in excess
of 25.1%. The City of Kiel's option may be exercised during the two year period
after it becomes exercisable at a price per share equal to the fair value
(commercial value) of a Kiel AG share on the exercise date, as independently
determined by an investment bank.
In January 2001, TXU Europe entered into a commitment to sell its 19.2%
interest in Hidroelectrica del Cantabrico, SA (Hidrocantabrico) to a consortium
led by Electricidade de Portugal S.A., a Portugese utility company, and Spanish
savings bank Caja de Ahorro de Asturias (Cajastur) for (Euros) 24 per share. TXU
Europe waived the pre-emption rights it had over 4.9% of the stock in
Hidrocantabrico held by Electrabel SA (Electrabel), an electricity company in
Belgium. On April 20, 2001, TXU Europe received net proceeds of (Euros) 522
million ($468 million), realizing a pre-tax profit of approximately (Pounds)50
million ($74 million).
In February 2001, TXU Europe finalized the sale of its interest in the North
Sea gas fields for (Pounds)138 million ($196 million) as a result of its ongoing
review of its program to reposition its energy portfolio. TXU Europe received
net cash proceeds of (Pounds)97 million ($141 million) and recognized a pre-tax
gain of (Pounds)7 million ($9 million), which has been recorded in other income
(deductions)-net.
7
On August 3, 2000, TXU Europe purchased United Utilities plc's retail energy
supply business, Norweb Energi (a division of Norweb plc), for total
consideration, including direct costs of the acquisition, of (Pounds)340 million
($496 million). The transaction also included the assumption of certain of
Norweb Energi's obligations, including its power purchase agreements, which have
been integrated into TXU Europe's energy portfolio.
The acquisition of Norweb Energi was accounted for as a purchase business
combination. The process of determining the fair value of assets and
liabilities of Norweb Energi has not been completed. The latest estimate of
goodwill is (Pounds)622 million ($881 million) which is being amortized over 20
years. This amount is subject to further revision as additional information
becomes available, primarily relating to exit costs and other liabilities
assumed at acquisition. The final determination of the purchase accounting
adjustments requires additional information and analysis, which is ongoing and
is expected to be completed within one year of the acquisition date.
The results of operations of Norweb Energi are reflected in the consolidated
financial statements of TXU from the August 3, 2000 effective date of the
acquisition. The following summary of unaudited pro forma consolidated results
of TXU's operations reflect the acquisition of Norweb Energi as though it had
occurred at the beginning of the comparable period of 2000.
Three Months
Ended
March 31,
2000
------------
Operating revenues........................... $5,301
Operating income............................. 664
Net income................................... 208
The pro forma results above are not necessarily indicative of what the actual
results would have been had the acquisition actually occurred at the beginning
of the period. Further, the pro forma amounts are not intended to be a
projection of future results of the combined companies. In particular, the above
amounts do not take into account the expected impact Norweb Energi would have on
the timing of earnings from the UK electricity portfolio across the year such
that profits in the first and fourth quarters are expected to be reduced, with a
more than offsetting increase in the second and third quarters. This arises
from constant retail customer prices throughout the year compared with more
seasonal wholesale contracts and spot prices.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The condensed consolidated financial statements of
TXU and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP) and,
except for the adoption of the new accounting standard discussed below, on the
same basis as the audited financial statements included in its 2000 Form 10-K.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results of operations and
financial position have been included therein. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with US GAAP have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The results of
operations for an interim period may not give a true indication of results for
the full year. Certain previously reported amounts have been reclassified to
conform to current classifications. All dollar amounts in the financial
statements and tables in the notes, except per share amounts, are stated in
millions of US dollars unless otherwise indicated.
8
Change in Accounting Standards -- On January 1, 2001, TXU adopted Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as extended by SFAS No. 137 (June 1999) and
amended by SFAS No. 138 (June 2000). All derivatives within TXU have been
accounted for pursuant to SFAS No. 133 requirements. TXU enters into derivative
transactions within its merchant energy trading activities, which are accounted
for on the mark-to-market accounting method. These derivatives have been entered
into with the objective of generating profits on, or from exposure to, shifts or
changes in market prices. TXU also enters into derivative transactions to hedge
market risks related to changes in interest rates, foreign currency exchange
rates and commodity prices. TXU has designated, documented and assessed those
derivative hedging relationships, the majority of which are cash-flow hedges
that require TXU to record the derivative assets or liabilities at their fair
value on its balance sheet with an offset in other comprehensive income for the
portion of the hedge that is effective according to a method prescribed by SFAS
No. 133 in offsetting changes in fair value of the hedged item. Ineffectiveness
is recorded in earnings.
Interest Rate Risk Management -- TXU enters into derivatives to manage
exposures to the market risk inherent in fixed rate debt securities and the cash
flow risk inherent in variable rate securities. Derivative instruments that are
used as part of TXU's interest rate risk-management strategy include interest
rate swaps, forward rate agreements, and options contracts. TXU uses derivatives
to convert a portion of its variable-rate debt to fixed rates. The resulting
cost of funds is lower than it would have been had fixed-rate borrowings been
issued directly. Substantially all of these derivatives are designated as cash-
flow hedges.
Foreign Currency Risk Management -- TXU has exposure to foreign currency
risks, primarily with the pound sterling and the Australian dollar. TXU Europe
and TXU Australia have accessed the US capital markets and issued dollar
denominated obligations. TXU enters into currency swaps, options and forwards,
where appropriate, to manage foreign currency exposures on foreign currency-
denominated transactions. Substantially all of these derivatives are designated
as cash flow hedges.
TXU and its subsidiaries have numerous investments in foreign subsidiaries,
and the net assets and earnings of these subsidiaries are exposed to currency
exchange-rate volatility. Through March 31, 2001, TXU and its subsidiaries have
not entered into derivative transactions to hedge their material net investments
in foreign operations, but subsidiaries have used foreign currency-denominated
debt as the hedge. On April 30, 2001, TXU Europe entered into a foreign
currency swap which has been designated as a hedge of the net investment in a
foreign company.
Energy Price Risk Management -- TXU's electricity and gas operations expose
it to market risk related to those commodities. TXU's strategy to manage this
risk is to balance the retail load profile with physical and financial commodity
contracts in a designated order up to a desired amount of forecasted purchases
and sales and to designate them as cash-flow hedges. TXU uses a combination of
physical and financial contracts including short- and long-term power purchase
and sale agreements, contracts for differences, electricity forward agreements,
fuel supply contracts and other contracts in managing these risks.
Financial Summary -- TXU formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value, cash-flow or foreign-
currency hedges to specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions. The maximum term over
which TXU hedges its exposure to the variability of future cash flows (for all
forecasted transactions, excluding interest payments on variable-rate debt) is
26 years. Amounts are removed from other comprehensive income as the underlying
transactions occur.
In accordance with the transition provisions of SFAS No. 133, TXU recorded,
as of January 1, 2001 a cumulative effect of $132 million after-tax as a
decrease to other comprehensive income to recognize the fair value of all
derivatives effective as cash-flow hedging instruments.
9
Essentially all of the terms of TXU's derivatives match the terms of the
underlying hedged item. As a result TXU experienced minimal hedge
ineffectiveness of $1 million (reported as Interest Expense), which represented
the total ineffectiveness of all cash-flow hedges, mainly from treasury hedges.
There was no ineffectiveness on the cash flow hedges of the energy derivatives.
As of March 31, 2001, $194 million of net losses included within the net
gains/losses on derivative instruments accumulated in other comprehensive income
are expected to be reclassified into earnings during the next twelve months.
This amount is not a forecasted loss incremental to normal operations, but
rather it demonstrates the extent to which volatility in earnings (which would
otherwise exist) is mitigated through the presence of cash flow hedges.
Ongoing implementation issues being addressed by the Derivatives
Implementation Group (DIG) may affect the application of SFAS No. 133. In its
normal course of business, TXU enters into commodity contracts that include
options to buy or sell certain volumes of the underlying commodity. TXU and its
customers use these contracts to provide some of their commodity requirements.
TXU evaluated these contracts and determined that they qualified for the normal
purchases and sales exception provided by SFAS No. 133. In October 2000, the
DIG reached a tentative conclusion that option contracts do not qualify for such
exception. In April 2001, the Financial Accounting Standards Board approved
this tentative conclusion, and these contracts will be required to be accounted
for as derivatives commencing July 1, 2001. TXU is evaluating the impact of
this decision.
There are a number of issues pending before the DIG that may have an impact
on the application of SFAS No. 133. Management is unable to predict the
ultimate outcome of these issues.
The effect on net income for the three months ended March 31, 2001 from
implementing SFAS No. 133 has not been significant. The majority of derivative
contracts are merchant energy trading derivatives and already were being marked-
to-market. The remaining derivatives identified are designated as, and are
effective as, cash flow hedges, with changes in the fair value of derivatives
reflected in other comprehensive income.
SFAS No. 140 -- Securitization Standard -- SFAS No. 140, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities",
is effective for TXU for transfers on or after April 1, 2001. SFAS No. 140
replaces SFAS No. 125. SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
required disclosures, but carries over most of SFAS No. 125's provisions without
reconsideration. TXU's sale of receivables programs have been determined to be
compliant with the requirements of SFAS No. 140 and therefore will not be
impacted by the adoption of this standard.
Earnings Per Share -- Basic earnings per share applicable to common stock are
based on the weighted average number of common shares outstanding during the
period reported. Diluted earnings per share include the effect of potential
issuance of common shares resulting from the assumed exercise of all outstanding
stock options and settlement of forward stock purchase agreements. TXU has
outstanding certain instruments that are convertible into common stock or that
may be settled with common stock but do not qualify as dilutive securities for
computation of earnings per share. The number of shares of common stock added
to the average shares outstanding for the purpose of calculating diluted
earnings per share were 181 thousand and 861 thousand for the three months ended
March 31, 2001 and 2000, respectively.
3. SHORT-TERM FINANCING
In January 2001, TXU Europe borrowed an additional (Euros) 182 million ($160
million) at 5.54% per annum under its (Pounds)300 million 364-day revolving
credit facility, as part of the financing to acquire Kiel AG. Also in January
2001, the (Pounds)150 million Eastern Electricity revolving credit balance was
repaid.
Accounts Receivable -- TXU Europe continually sells additional receivables to
replace those collected. During the three months ended March 31, 2001, TXU
Europe sold (Pounds)612 million ($867 million) in receivables under the program.
Such sales resulted in no gain or loss. Under the program, TXU Europe has a
receivables servicing obligation but does not incur a measurable asset or
liability. At March 31, 2001, accounts receivable of TXU Europe were reduced by
(Pounds)204 million ($289 million) under the program and (Pounds)5 million ($7
million) of future receivables sold were reflected as other short-term loans on
the balance sheet. These
10
amounts bear interest at an annual rate, which was 5.60% at March 31, 2001,
based on commercial paper rates plus a margin. TXU Gas continually sells its
customer accounts receivable to a wholly-owned bankruptcy-remote subsidiary,
which sells undivided interests in these accounts receivable to financial
institutions. TXU Electric also has facilities which provide financing through
sales of receivables. The amounts and terms of these programs have not changed
from December 31, 2000.
4. LONG-TERM DEBT
US -- On April 12, 2001, the Brazos River Authority issued $120,750,000
aggregate principal amount of Pollution Control Revenue Refunding Bonds, Series
2001A, due October 1, 2030 for TXU Electric. The Brazos River Authority 2001A
bonds will bear interest at a rate of 4.95% per annum until the mandatory tender
date of April 1, 2004. Proceeds from the issuance and sale of the Brazos River
Authority 2001A bonds were used to refund the entire principal amount of the 7-
7/8% Brazos River Authority Series 1991A bonds and $20,750,000 of the Brazos
River Authority Taxable Series 1993 bonds.
Europe -- At March 31, 2001, TXU Europe and TXU Finance (No.2) Limited had a
joint sterling-denominated line of credit with a group of banking institutions
under a credit facility agreement (Sterling Credit Agreement). As of March 31,
2001, the Sterling Credit Agreement provided for borrowings of up to
(Pounds)1.075 billion ($1.5 billion) and has two facilities: a (Pounds)750
million ($1.1 billion) term facility and a (Pounds)325 million ($460 million)
revolving credit facility (Tranche B), both of which terminate on March 2, 2003.
The Sterling Credit Agreement allows for borrowings in various currencies with
interest rates based on the prevailing rates in effect in the countries in which
the borrowings originate. In January 2001, in connection with the acquisition of
Kiel AG, TXU Europe borrowed an additional (Euros) 47 million ($41 million)
under Tranche B. As of March 31, 2001, (Pounds)750 million ($1.1 billion) of
borrowings was outstanding under the term facility at an interest rate of 6.4%
per annum. Outstanding Tranche B borrowings and weighted average interest rates
in effect at March 31, 2001 consisted of 700 million Norwegian kroner (NOK) ($77
million) at 8.1% per annum and (Euros) 314 million ($276 million) at 5.4% per
annum.
TXU Europe has a (Euros) 2.0 billion Euro Medium Term Note (EMTN) program.
Under the EMTN program, TXU Europe may from time to time issue notes on a
continuing basis to one or more dealers in an aggregate principal amount
outstanding of (Euros) 2.0 billion. At March 31, 2001, there was (Pounds)676
million ($958 million) of various borrowings outstanding under this program with
an aggregate weighted average interest rate of 7.1% per annum.
In January 2001, the outstanding balance of the rent factoring loans due to
banks of (Pounds)190 million ($269 million) was repaid.
5. SHAREHOLDERS' EQUITY
March 31,
2001 December 31,
(Unaudited) 2000
---------- ------
Shareholders' equity:
Preference stock.............................................................................. $ 300 $ 300
------ ------
Common stock without par value:
Authorized shares -- 1,000,000,000
Outstanding shares: 2001 -- 258,138,897 and 2000 -- 258,108,897........................ 6,364 6,360
Common stock repurchasable under equity forward contracts..................................... (146) (190)
Retained earnings............................................................................. 1,863 1,817
Accumulated other comprehensive loss.......................................................... (882) (511)
------ ------
Total common stock equity........................................................... 7,199 7,476
------ ------
Total shareholders' equity.......................................................... $7,499 $7,776
====== ======
Common Stock -- At December 31, 2000 and March 31, 2001, TXU had two equity
purchase agreements with separate financial institutions to purchase shares of
TXU's common stock. The timing and amount of these purchases are made at the
direction of management. The repurchase price is the weighted average price per
share the financial institutions paid, plus commissions and interest, less
dividends. The contracts are recorded at
11
the maximum cash settlement amount that would be required to physically settle
the contracts of $146 million at March 31, 2001. On April 16, 2001, TXU
purchased 1,252,500 shares of its common stock for $44 million by partially
settling one of the equity purchase agreements. TXU expects to close these
contracts without purchasing shares in 2001. Settlement of these agreements has
no effect on earnings.
6. TRUST SECURITIES
TXU or Subsidiary Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trusts, Each Holding Solely Junior Subordinated Debentures of TXU or
Related Subsidiary (Trust Securities) -- The statutory business trust
subsidiaries had Trust Securities and Trust Assets outstanding, as follows:
Trust Securities Trust Assets Maturity
-------------------------------------------------- ---------------------- --------
Units (000's) Amount Amount
------------------------- ----------------------- ----------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2001 2000 2001 2000 2001 2000
------ ------ ------ ------ ------ ------
TXU
- ---
TXU Capital I
(7.25% Series).................. 9,200 9,200 $ 223 $ 223 $ 237 $ 237 2029
TXU Capital II
(8.7% Series)................... 6,000 6,000 145 145 155 155 2034
------ ------ ------ ------ ------ ------
Total TXU....................... 15,200 15,200 368 368 392 392
------ ------ ------ ------ ------ ------
TXU Electric
- ------------
TXU Electric Capital I
(8.25% Series).................. 5,871 5,871 141 141 155 155 2030
TXU Electric Capital III
(8.00% Series).................. 8,000 8,000 194 194 206 206 2035
TXU Electric Capital IV
(Floating Rate Trust
Securities)(a).................. 100 100 98 98 103 103 2037
TXU Electric Capital V
(8.175% Trust Securities)...... 400 400 396 396 412 412 2037
------ ------ ------ ------ ------ ------
Total TXU Electric.............. 14,371 14,371 829 829 876 876
------ ------ ------ ------ ------ ------
TXU Gas
- -------
TXU Gas Capital I
(Floating Rate Trust
Securities)(b).................. 150 150 147 147 155 155 2028
------ ------ ------ ------ ------ ------
Total........................... 29,721 29,721 $1,344 $1,344 $1,423 $1,423
====== ====== ====== ====== ====== ======
(a) Floating rate is determined quarterly based on LIBOR. A related interest
rate swap, expiring 2002, effectively fixes the rate at 7.183%.
(b) Floating rate is determined quarterly based on LIBOR. Related interest rate
swaps, expiring 2003, effectively fix the rates at 6.629% on $100 million
and at 6.444% on $50 million.
Each parent company owns the common trust securities issued by its
subsidiary trust and has effectively issued a full and unconditional guarantee
of such trust's Trust Securities.
12
7. REGULATION AND RATES
Regulations and Rates -- Certain of TXU's subsidiaries have ongoing
proceedings outstanding with various regulatory agencies as of March 31, 2001
that are in different stages of completion. TXU cannot predict the outcome of
these proceedings. The status of these proceedings as of March 31, 2001 is not
significantly different from their status as set forth in note 13 to Financial
Statements, Regulation and Rates, included in the 2000 Form 10-K except as
presented below.
Docket No. 22350 -- Legislation was passed during the 1999 session of the
Texas Legislature that will restructure the electric industry in Texas (1999
Restructuring Legislation). As required by the 1999 Restructuring Legislation,
in January 2000, TXU Electric filed its business separation plan with the Public
Utility Commission of Texas (PUC). In March 2000, TXU Electric filed its
application for approval of its unbundled cost of service rates with the PUC.
This plan and application lay the foundation for TXU Electric to take part in
retail competition to begin in the Texas electricity market. Under the business
separation plan, the generation business unit and the retail business unit will
become unregulated entities and will be allowed to compete for customers. The
transmission and distribution (T&D) business units will be separated into
regulated entities and will together represent the regulated part of the
business. In addition to the actual T&D charges for delivering electricity,
these rates include nuclear decommissioning fund charges, system benefit fund
charges and stranded cost recovery charges. In the March 2000 filing, stranded
costs were estimated to be approximately $3.7 billion, including the regulatory
assets that were part of the Docket No. 21527 proceedings and amounts related to
the remand of Docket No. 9300, addressed below. TXU Electric filed an updated
stranded cost estimate on August 28, 2000 to reflect various decisions made
since Docket No. 22350 was filed. In the August 28, 2000 filing, TXU Electric's
stranded costs were estimated to be $2.8 billion. Subsequent to the August 2000
filing, the PUC has required TXU Electric to revise the stranded cost estimate
to remove amounts related to regulatory assets, certain environmental
expenditures, and the remand of Docket No. 9300, which resulted in a revised
estimate of $14 million, including displaced worker costs. On March 7, 2001, the
PUC issued an Interim Order requiring TXU Electric to file a revised stranded
cost estimate. On March 28, 2001, TXU Electric filed such revised stranded cost
estimate of negative $2.2 billion pursuant to that order. On April 9, 2001 the
PUC issued another Interim Order that required TXU Electric to file a further
revised stranded cost estimate. On April 18, 2001, TXU Electric filed that
required revised estimate, which reflected stranded costs of negative $2.7
billion. The PUC is expected to issue a final order on these matters by August
2001. TXU Electric strongly disagrees with the methodology required by the PUC
pursuant to which these stranded costs were calculated as being inconsistent
with the 1999 Restructuring Legislation and has appealed certain of the PUC's
decisions related to this matter to the Travis County, Texas District Court. On
April 25, 2001, the PUC issued an interim order that addressed TXU Electric's
rates for T&D service that will become effective when retail competition begins.
Among other things, that order would require TXU Electric to reverse the effects
of the T&D depreciation reclassifications and to refund, over the period from
2002-2006, both the 1998-2000 earnings in excess of the earnings cap as well as
an estimate of the 2001 earnings in excess of the earnings cap. The estimate
established in Docket No. 22350 is subject to a future market-based "true-up" in
2004.
Docket No. 9300/Docket No. 22652 -- The PUC's final order (Order) in
connection with TXU Electric's January 1990 rate increase request (Docket No.
9300) was ultimately reviewed by the Texas Supreme Court. As a result, an
aggregate of $909 million of disallowances with respect to TXU Electric's
reacquisitions of minority owners' interests in Comanche Peak, which had
previously been recorded as a charge to TXU Electric's earnings, was remanded to
the District Court with instructions that it be remanded to the PUC for
reconsideration on the basis of a prudent investment standard. On remand, the
PUC also was required to reevaluate the appropriate level of TXU Electric's
construction work in progress included in rate base in light of its financial
condition at the time of the initial hearing. In connection with the settlement
of Docket No. 18490, proceedings in the remand of Docket No. 9300 had been
stayed through December 31, 1999. In April 2000, TXU Electric requested that
the District Court enter an order remanding Docket No. 9300 to the PUC. On June
9, 2000, the District Court's order of remand was filed with the PUC, and the
PUC has assigned the remand proceeding Docket No. 22652. Hearings are currently
scheduled for October 2001, and a final decision is expected in 2002.
13
Docket No. 22880/Docket No. 23153 -- Because natural gas prices exceeded
those in the base fuel factor, on August 4, 2000, TXU Electric filed a request
with the PUC in Docket No. 22880 to surcharge the cumulative under-collection of
fuel cost revenues that existed as of June 30, 2000, together with interest
through November 2000, in the amount of $167 million, and to increase its
current fuel factors by 27.6%. On August 31, 2000, the Administrative Law Judge
entered an Interim Order, implementing an agreement of the parties, providing
for an interim increase in fuel factors of 13.8%, effective September 6, 2000,
and a surcharge of TXU Electric's cumulative under-recovery of fuel cost
revenues that existed as of July 31, 2000, together with interest through
November 2000, in the amount of $315 million to be collected over the fourteen-
month period beginning November 2000. On October 13, 2000, TXU Electric filed a
Supplemental Application with the PUC requesting its initial 27.6% fuel factor
increase instead of the interim increase. In addition, on January 11, 2001, the
PUC approved the requested fuel factor increase, effective that date. Also on
October 13, 2000, TXU Electric filed a request with the PUC in Docket No. 23153
for a surcharge to recover a $231 million under-collection of fuel cost revenues
for the months of August and September 2000. The proposed surcharge was to be
collected from January 2001 through December 2001. Docket No. 23153 was
subsequently consolidated into Docket No. 22880. On January 11, 2001, the PUC
approved TXU Electric's requests in Docket No. 22880 and Docket No. 23153. The
PUC also approved the surcharge request filed in Docket No. 23153, effective
January 11, 2001 through December 31, 2001.
Docket No. 23640 -- In February 2001, TXU Electric filed with the PUC a
request for a surcharge to recover under-collected fuel cost revenues of $351
million for the months of October 2000 through December 2000, plus estimated
under-recoveries of $238 million for the period January 2001 through March 2001
and to increase its current fuel factor by 26.4% over the increase approved in
Docket 22880. On March 19, 2001, the Administrative Law Judge struck TXU
Electric's request to surcharge the estimated under-recoveries for the January
2001 through March 2001 period. On May 8, 2001, the PUC approved the amount of
the surcharge for October 2000 through December 2000 but ruled that surcharging
the under-recovery incurred during that period will be deferred for
consideration until TXU Electric's true-up proceeding in 2004. The PUC also
affirmed the action of the Administrative Law Judge and refused to consider the
surcharge for the months of January 2001 through March 2001. The PUC also
adopted TXU Electric's proposed fuel factor request with one change that would
increase the level of the fuel factor requested by TXU Electric.
Other -- TXU Gas employs a continuing program of rate review for all classes
of customers in its regulatory jurisdictions. Rate relief amounting to about
$19.8 million in annualized revenue increases, exclusive of changes in gas
costs, was granted in 2000. During 2001, rate cases supporting $15.0 million in
annualized revenue increases have been filed in 178 cities.
8. CONTINGENCIES
Legal Proceedings -- UK -- In February 1997, the official government
representative of pensioners (Pensions Ombudsman) made a final determination
against the National Grid Company plc (National Grid) and its group trustees
with respect to complaints by two pensioners in National Grid's section of the
Electricity Supply Pension Scheme (ESPS). The determination related to the use
of the pension fund surplus resulting from the March 31, 1992 actuarial
valuation of the National Grid section to meet certain costs arising from the
payment of pensions on early retirement upon reorganization or downsizing. This
determination was set aside by the High Court on June 10, 1997, and the
arrangements made by National Grid and its group trustees in dealing with the
surplus were confirmed. The two pensioners appealed this decision to the Court
of Appeal, and judgment was received. The judgment endorsed the Pensions
Ombudsman's determination that the corporation was not entitled to unilaterally
deal with any surplus. National Grid appealed the decision to the House of Lords
and, on April 4, 2001, the appeal was allowed. The House of Lords found that
National Grid was entitled to use the surplus funds as they had done. As a
result of the decision of the House of Lords, TXU Europe considers that the
likelihood of a claim of this nature being made against it to be remote.
14
On January 25, 1999, the Hindustan Development Corporation (HDC) issued
arbitration proceedings in the Arbitral Tribunal in Delhi, India against The
Energy Group PLC (TEG) (now Energy Holdings (No.3) Limited), claiming damages of
(Pounds)255 million ($361 million) for breach of contract following the
termination of a Joint Development Agreement dated March 20, 1997 relating to
the construction, development and operation of a lignite based thermal power
plant at Barsingsar, Rajasthan. On November 21, 2000, the Arbitrators issued
their decision and dismissed HDC's claim in full, and TEG was liable only for
its own legal costs involved in the case, an estimated (Pounds)1 million ($1.4
million). On December 21, 2000, HDC filed a Request for Clarification of the
Arbitrators' decision (Request) under Section 33 of the Arbitration and
Conciliation Act, the purpose of which is to entitle a party to arbitration to
seek clarification of language used in the Arbitrators' decision. TEG filed its
response to the Request on January 15, 2001, asserting that the Request was
untimely made and that the language used by the Arbitrators needed no
clarification. TXU Europe believes that the Arbitrators will have no alternative
but to dismiss the Request. The effect of filing the Request, however, has been
to stay the time HDC has to file an appeal of the Arbitrators' decision.
In August 2000, the Spanish Stock Market Commission announced it was opening
an investigation as to whether TXU Europe and Electrabel acted in concert over
share purchases of Hidrocantabrico in order to avoid making a formal takeover
bid. TXU was originally named as a party but is seeking its removal from these
proceedings. If the two utilities are found to be in violation of Spanish
securities law, they could face a substantial fine and other restrictions. The
investigation could last until February 2002. TXU Europe is unable to determine
what impact there may be, if any, as a result of the investigation. TXU Europe
and TXU believe there has been no violation of Spanish securities laws and are
fully cooperating with the investigation.
General -- In addition to the above, TXU and its subsidiaries are involved in
various other legal and administrative proceedings which, in the opinion of
management, should not have a material effect upon their financial position,
results of operations or cash flows.
Financial Guarantees -- TXU Electric has entered into contracts with public
agencies to purchase cooling water for use in the generation of electric energy
and has agreed, in effect, to guarantee the principal, $22 million at March 31,
2001, and interest on bonds issued to finance the reservoirs from which the
water is supplied. The bonds mature at various dates through 2011 and have
interest rates ranging from 5-1/2% to 7%. TXU Electric is required to make
periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to TXU Electric, of $4 million annually
for the years 2001 through 2003, $7 million for 2004 and $1 million for 2005. In
addition, TXU Electric is obligated to pay certain variable costs of operating
and maintaining the reservoirs. TXU Electric has assigned to a municipality all
contract rights and obligations of TXU Electric in connection with $42 million
principal amount of bonds outstanding at March 31, 2001, that had been issued
for similar purposes and previously guaranteed by TXU Electric. TXU Electric is,
however, contingently liable in the unlikely event of default by the
municipality.
TXU Europe has guaranteed up to $110 million at March 31, 2001 of certain
liabilities that may be incurred and payable by the purchasers of TEG's US and
Australian coal business and US energy marketing operations sold in 1998 prior
to the acquisition of TEG by TXU. These guarantees are with respect to the
Peabody Holding Company Retirement Plan for Salaried Employees, the Powder River
Coal Company Retirement Plan and the Peabody Coal UMWA Retirement Plan and are
subject to certain specified conditions.
15
9. SEGMENT INFORMATION
TXU has five reportable operating segments.
(1) US Electric - operations involving the generation, purchase,
transmission, distribution and sale of electric energy in the north central,
eastern and western portions of Texas;
(2) US Gas - operations involving the purchase, transmission, distribution
and sale of natural gas in Texas;
(3) US Energy - operations involving the purchase and sale of natural gas and
electricity and the provision of risk management and retail energy services for
the energy industry throughout the US and parts of Canada;
(4) Europe - operations involving the generation, purchase, distribution,
marketing and sale of electricity; the purchase and sale of natural gas; and
merchant energy trading; within the UK but increasingly throughout the rest of
Europe; and
(5) Australia - operations involving the generation, purchase, distribution,
trading and retailing of electricity and the retailing, storage and distribution
of natural gas, primarily in the States of Victoria and South Australia.
Three Months Ended
March 31,
--------------------
2001 2000
------ ------
Operating revenues -
US Electric......................................................................... $1,839 $1,363
US Gas.............................................................................. 680 324
US Energy........................................................................... 2,281 1,039
Europe.............................................................................. 3,365 1,849
Australia........................................................................... 180 148
All Other........................................................................... 30 53
------ ------
Consolidated................................................................ $8,375 $4,776
====== ======
Affiliated revenues -
US Gas.............................................................................. $ 4 $ 8
US Energy........................................................................... 1 (1)
All Other........................................................................... 110 82
Eliminations........................................................................ (115) (89)
------ ------
Consolidated.............................................................. $ -- $ --
====== ======
Net income (loss) -
US Electric......................................................................... $ 157 $ 145
US Gas.............................................................................. 39 30
US Energy........................................................................... (10) (8)
Europe.............................................................................. 67 67
Australia........................................................................... 8 11
All Other........................................................................... (60) (52)
------ ------
Consolidated................................................................ $ 201 $ 193
====== ======
16
10. RESTRUCTURING CHARGES AND OTHER COSTS
During the three months ended March 31, 2001 and 2000, TXU Europe recorded
restructuring charges and other costs of $24 million and $67 million pre-tax
($17 million and $50 million after-tax), respectively. Included in the costs
for 2000, was $9 million of costs associated with the offer for Hidrocantabrico.
The majority of the remaining costs consisted of asset writedowns and other exit
and redundancy costs (severance benefits paid to staff under voluntary
retirement programs and related pension benefits), were primarily a result of
contracting TXU Europe's customer service operations to Vertex Data Science
Limited, the creation of the joint venture 24seven and certain other staff
reorganizations.
For the three months ended March 31, 2001, pre-tax restructuring charges
consisted of redundancy costs of $6 million related to termination benefits for
31 employees that had accepted the benefits, $12 million of asset writedowns
and $6 million of other exit costs. For the three months ended March 31, 2000,
pre-tax restructuring costs consisted of redundancy costs of $24 million
related to voluntary termination benefits for 296 employees that have accepted
the benefits, $11 million for asset writedowns and $24 million of other exit
costs. All of these costs, except the asset writedowns which were charged to
depreciation expense, have been recorded in operation and maintenance expense.
During the three months ended March 31, 2001, $6 million of redundancy costs
and $3 million of other exit costs charged during the three months then ended
have been paid. There were no payments made during the three months ended March
31, 2000.
17
11. SUPPLEMENTARY FINANCIAL INFORMATION
Accounts receivable -- At March 31, 2001 and December 31, 2000 accounts
receivable are stated net of uncollectible accounts of $70 million and $75
million, respectively.
Inventories by major category --
March 31,
2001 December 31,
(Unaudited) 2000
----------- ------------
Materials and supplies............................................................................... $ 230 $ 218
Fuel stock........................................................................................... 111 141
Gas stored underground............................................................................... 101 133
------- -------
Total inventories................................................................................ $ 442 $ 492
======= =======
Property, plant and equipment --
March 31,
2001 December 31,
(Unaudited) 2000
----------- ------------
United States (US):
Electric........................................................................................ $24,245 $24,121
Gas distribution and pipeline................................................................... 1,539 1,509
Other........................................................................................... 738 730
------- -------
Total................................................................................... 26,522 26,360
Less accumulated depreciation................................................................... 8,954 8,750
------- -------
Net of accumulated depreciation........................................................ 17,568 17,610
Construction work in progress................................................................... 528 425
Nuclear fuel (net of accumulated amortization: 2001 -- $734; 2000 -- $716)...................... 172 179
Held for future use............................................................................. 22 22
Reserve for regulatory disallowances............................................................ (836) (836)
------- -------
Net US property, plant and equipment................................................... 17,454 17,400
Europe - Electric and other (net of accumulated depreciation: 2001 -- $560; 2000 -- $594)............ 4,062 4,153
Australia - Electric and gas distribution and generation (net of accumulated depreciation:
2001 -- $209; 2000 -- $226)..................................................................... 1,515 1,748
------- -------
Net property, plant and equipment...................................................... $23,031 $23,301
======= =======
Goodwill -- At March 31, 2001 and December 31, 2000, goodwill is stated net
of accumulated amortization of $530 million and $504 million, respectively.
Credit Risk -- Credit risk relates to the risk of loss that TXU would incur
as a result of nonperformance by counterparties. TXU maintains credit policies
with regard to its counterparties that management believes significantly
minimize overall credit risk. These policies include an evaluation of potential
counterparties' financial condition (including credit rating), guarantees and
collateral requirements and the use of standardized agreements that allow for
the netting of positive and negative exposures associated with a single
counterparty.
California -- The State of California continues to work through its
transition to deregulation in an environment of insufficient energy supply
compounded by volatile natural gas prices. This situation has financially
distressed California's utilities. However, due to the uncertainties
surrounding the California power situation, management cannot predict the
effects of the California situation on merchant energy trading counterparties,
legislation and the capital markets.
18
Concentration of Credit Risk -- During the three months ended March 31, 2001,
TXU's global merchant energy trading activity and retail operations grew
substantially. Systems and procedures have been implemented to continually
monitor the counterparty risk exposure throughout its various trading regions.
Price and credit risk are evaluated daily within the established trading
policies and limits established for the various regions.
TXU's regional gross exposure to trading and nontrading credit risk (before
any netting agreements or reserves) as of March 31, 2001 is as follows:
Region Gross Exposure
------ --------------
US............................................. $2,242
Europe......................................... 2,822
Australia...................................... 388
------
Consolidated................................... $5,452
======
These regional concentrations have the potential to affect TXU's overall
exposure to credit risk, either positively or negatively, in that the customer
base and counterparties may be similarly affected, both regionally and globally,
by changes in economic, regulatory, industry, weather or other conditions.
One customer's global exposure to TXU represented 6% of the gross fair value
of TXU's accounts receivable, merchant energy trading assets and derivative
assets at March 31, 2001. (This customer represented 9% of TXU Europe's credit
risk balance as of the same date.) TXU's counterparties are primarily major
energy companies and financial institutions that are considered to be of
investment grade, determined using publicly available information including a
Standard & Poor's rating of at least BBB-. The risk of loss to TXU arising from
non-performance by these counterparties is considered unlikely.
Based on TXU's policies, its exposures and its credit and other reserves,
TXU does not anticipate a materially adverse effect on its financial position or
results of operations as a result of nonperformance by a counterparty.
19
INDEPENDENT ACCOUNTANTS' REPORT
TXU Corp:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Corp. (TXU) and subsidiaries as of March 31, 2001, and the related condensed
statements of consolidated income, comprehensive income (loss) and cash flows
for the three-month periods ended March 31, 2001 and 2000. These financial
statements are the responsibility of TXU's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
as of December 31, 2000, and the related statements of consolidated income,
comprehensive income, cash flows and shareholders' equity for the year then
ended (not presented herein); and in our report, dated February 1, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 11, 2001
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars:
Income Statements
(Average Rates)
Balance Sheet ------------------------------------
---------------------------------------- Three Months
March 31, December 31, Ended March 31,
------------------- ------------------- ------------------------------------
2001 2000 2001 2000
------- ------- ------- -------
UK pounds sterling ((Pounds)) $1.4168 $1.4935 $1.4599 $1.6063
Australian dollars (A$) $0.4858 $0.5599 $0.5325 $0.6317
Euro $0.8792 $0.9421 $0.9247 $0.9882
Net income available for common stock for the first quarter of 2001 was $196
million ($0.76 per share) compared with $193 million ($0.71 per share) for the
first quarter of 2000. Results for the 2001 quarter benefited from the US
Electric segment's continued strong revenue and customer growth and weather-
related energy sales. The US Gas segment net income increased by 30% for the
2001 quarter compared to the 2000-quarter as a result of rate relief from a
revenue enhancement program and increased gas transportation due to colder
weather in the first quarter of 2001. The US Energy segment results reflect
improved margins offset by higher operation and maintenance expenses related to
the development of retail energy services operations and the expansion of
trading operations. The Australia segment results reflect increased merchant
trading results due to higher energy prices and warmer weather. The Europe
segment results remained essentially unchanged in US dollar terms for the first
quarter of 2001 compared to 2000. The Europe segment results for the first
quarter of 2001 reflect restructuring charges and other costs of approximately
$24 million ($17 million after tax) compared to $67 million ($50 million after-
tax) of such costs for the first quarter of 2000. The regulatory networks rate
reduction implemented in April 2000 and a stronger US dollar offset the growth
in Europe's merchant energy trading business and the effects of the Norweb
Energi acquisition.
Revenue of $8.4 billion for the first quarter of 2001 increased 75% from $4.8
billion for the first quarter of 2000. The increase in revenue was driven by
increases in merchant energy trading activities from the Europe, US Energy and
Australia segments, and increased revenues from the US Electric and US Gas
segments due to higher fuel prices, colder weather and customer growth and a
revenue enhancement program for the US Gas segment. Revenues for the 2001
quarter were also positively affected by $480 million from TXU Europe's
acquisitions of Norweb Energi and Stadtwerke Kiel AG (Kiel AG) in August 2000
and January 2001, respectively.
Energy purchased for resale and fuel consumed for the first quarter of 2001
were 121% greater than the prior-year first quarter due to higher prices and
sales volumes in the US Electric, US Gas and Europe segments and the
acquisitions of Norweb Energi and Kiel AG. Operating and maintenance expense
was higher in the first quarter of 2001 than the same period of 2000, primarily
due to Norweb Energi and Kiel AG operations acquired by the Europe segment,
timing of generation maintenance expense and higher transmission costs partially
offset by related revenues for the US Electric segment and costs to develop and
support retail energy services operations and growth in trading operations for
US Energy. These increases were partially offset by a decrease in operation and
maintenance expense for the US Gas segment due to the sale of the gas processing
business in May 2000. Depreciation and amortization expense decreased 3% in the
first quarter of 2001 compared to 2000 primarily reflecting the Norweb Energi
and Kiel AG acquisitions, which were more than offset by the exchange rate
impact and change in depreciation and depreciable lives in the third quarter of
2000 by TXU Europe. The increase in goodwill amortization primarily reflects
the acquisitions of Norweb Energi and Kiel AG.
21
The effective tax rate for the 2001 quarter was 32% compared to 31% for 2000.
Differences in effective tax rates are primarily attributable to foreign tax
credits and other tax benefits associated with non-US operations and state
income taxes, partially offset by the effect of non-deductible goodwill
amortization.
SEGMENTS
Revenues and net income by operating segment are shown in Note 9 to Financial
Statements.
US Electric
- -----------
Segment Highlights
Three Months Ended
March 31,
--------------------
2001 2000
------- -------
Revenues (millions):
Base rate........................................................................ $ 995 $ 951
Transmission service............................................................. 44 43
Fuel............................................................................. 780 354
Other............................................................................ 20 15
------- -------
Total operating revenues................................................. $ 1,839 $ 1,363
======= =======
Electric energy sales (gigawatt-hours -- GWh)............................................. 24,463 22,543
Degree days (% of normal):
Heating.......................................................................... 109% 63%
The US Electric segment had net income of $157 million for the three months
ended March 31, 2001 compared with net income of $145 million for the three
months ended March 31, 2000. Margin for the segment increased by $50 million
from increased base rate revenues due to colder weather and customer growth.
Operation and maintenance expense increased by $21 million for the first quarter
of 2001 compared with the prior period due to the timing of generation
maintenance and increased transmission costs partially offset by increases in
related revenues. Taxes other than income for the 2001 period increased by $14
million from the 2000 period to the 2001 period due to higher state and local
gross receipt taxes and higher regulatory assessments.
US Gas
- ------
Segment Highlights
Three Months Ended
March 31,
--------------------
2001 2000
----- -----
Gas distribution:
Sales volumes (billion cubic feet -- Bcf)............................................ 74 49
Margin (millions).................................................................... $ 152 $ 122
Pipeline transportation:
Transportation volumes (Bcf)......................................................... 158 141
Revenues (millions).................................................................. $ 38 $ 35
Heating degree days (% of normal).......................................................... 109% 63%
For the three months ended March 31, 2001, the US Gas segment had net income
of $39 million compared with net income of $30 million for the three months
ended March 31, 2000. Gas distribution margins improved by $30 million in the
first quarter of 2001 over the 2000 period primarily due to rate relief granted
and increased volumes distributed. Gas pipeline margins improved by $6 million
between the 2000 and 2001 periods due to increased volumes transported. The
first quarter of 2000 includes $32 million of margin from the gas processing
operations which were sold in May 2000. Operation and maintenance expense
decreased by $11 million for the first quarter of 2001 compared to the first
quarter of 2000. The gas processing costs in the 2000 quarter were
22
greater than the increased gas distribution expenses in the 2001 quarter. Taxes
other than income increased by $7 million for the 2001 period over the 2000
period primarily due to an increase in state and local gross receipts taxes.
US Energy
- ---------
Segment Highlights
Three Months Ended
March 31,
------------------
2001 2000
----- -----
Trading and marketing volumes:
Gas (Bcf)........................................................................... 272 320
Electric (GWh)...................................................................... 5,359 3,704
The US Energy segment had a net loss of $10 million for the three months
ended March 31, 2001 compared with a net loss of $8 million for the three months
ended March 31, 2000. Improved margin for the segment was more than offset by
increased operation and maintenance expense and higher interest costs for the
2001 period compared to the 2000 period. Margin for the segment increased by
$21 million for the first quarter of 2001 over the 2000 period primarily due to
improved trading margins. In the first quarter of 2001, the retail energy
services business began signing customers within ERCOT for electricity
deliveries following deregulation of the electricity markets in Texas commencing
January 1, 2002. The contracts for such deliveries are derivatives;
accordingly, the retail energy services business recognized the value of such
derivatives, net of related reserves, of $2 million in earnings. Operation and
maintenance expense increased by $22 million from the 2000 period to the 2001
period primarily due to the development of retail energy services operations and
to support the growth in trading operations. Interest expense increased from $4
million in the 2000 period to $9 million in the 2001 period due to higher
borrowings.
Europe
- ------
Segment Highlights
Three Months Ended
March 31,
-------------------
2001* 2000
------ ------
Sales volumes:
Electric (GWh)............................................................................. 13,029 8,163
Gas (Bcf).................................................................................. 64 38
Units distributed (GWh).................................................................... 9,904 9,204
Wholesale energy sales:
Electricity (GWh)..................................................................... 43,750 24,435
Gas (Bcf)............................................................................. 379 186
Revenues (millions):
Electric................................................................................... $ 945 $ 670
Gas........................................................................................ 271 184
Distribution............................................................................... 127 189
Wholesale energy sales..................................................................... 1,823 844
Intra-segment eliminations and other....................................................... 199 (38)
------ ------
Total........................................................................... $3,365 $1,849
====== ======
*Includes results of Norweb Energi acquired on August 3, 2000 and Kiel AG
acquired on January 8, 2001.
Net income for the three months ended March 31, 2001 and 2000 was $67
million. Included in net income are results for Norweb Energi and Kiel AG
acquired on August 3, 2000 and January 8, 2001, respectively. Norweb Energi and
Kiel AG contributed $390 million and $90 million in revenues, respectively, for
the first quarter of 2001. Net income remained essentially unchanged, reflecting
a strong performance in merchant energy trading activities in continental Europe
and the UK, operating costs savings and lower levels of
23
restructuring costs, offset by the effect of the lower networks revenues and
higher interest and related charges and a stronger US dollar. Net interest
expense and other charges were $140 million for the three months ended March 31,
2001 compared with $118 million for the same period in 2000. This increase is
primarily due to increased borrowings to fund the Norweb Energi and Kiel AG
acquisitions and accelerated amortization of debt issue costs following the
early repayment of the rent factoring debt. In addition to the effect of the
inclusion of Norweb Energi and Kiel AG, high and volatile UK gas prices
benefited the merchant energy trading business and North Sea gas production
assets (until their sale in February, resulting in a pretax gain of $9 million).
Firmer prices in the Nordic region contributed to strong merchant energy trading
results in continental Europe. The expected effect of the Norweb Energi
acquisition on operating income is to alter the timing of earnings from the UK
electricity portfolio across the year such that profits in the first and fourth
quarters are reduced with a more than offsetting increase in the second and
third quarters. This arises from constant retail customer prices throughout the
year compared with more seasonal wholesale contracts and spot prices.
Revenues of $3.4 billion for the three months ended March 31, 2001 were up
82% compared with $1.8 billion for the three months of 2000. The improvement was
principally a result of increased trading volumes, particularly in merchant
energy trading activities and the inclusion of the results of Norweb Energi and
Kiel AG, partially offset by decreased revenues in the networks segment
resulting from the April 1, 2000 OFGEM distribution price review.
During the three months ended March 31, 2001 and 2000, TXU Europe recorded
restructuring charges and other costs of $24 million and $67 million pre-tax
($17 million and $50 million after-tax), respectively. Included in the costs
for 2000, was $9 million of costs associated with the offer for Hidrocantabrico.
The remaining costs, which consisted of asset writedowns and other exit and
redundancy costs (severance benefits paid to staff under voluntary retirement
programs and related pension benefits), were primarily a result of contracting
TXU Europe's customer service operations to Vertex Data Science Limited, the
creation of the 24seven joint venture and for certain other staff
reorganizations.
Australia
- ---------
Segment Highlights
Three Months Ended
March 31 ,
-------------------
2001* 2000
----- -----
Sales volumes:
Electric (Gwh)............................... 1,251 1,343
Gas (Bcf).................................... 13 14
Revenues (millions):
Electric..................................... $ 77 $ 88
Gas.......................................... 30 33
Other........................................ 73 27
---- ----
Total............................... $180 $148
==== ====
*Includes results of Optima Energy Pty. acquired on May 4, 2000.
Net income for the quarter ended March 31, 2001 was $8 million compared with
$11 million for the same period in 2000. The decrease in net income is primarily
due to the $8 million after-tax gain from the sale of Enetech reported in the
first quarter of 2000 and the effects of competitive pressures experienced with
customer contract renewals in July 2000. Excluding these items, net income
improved over the 2000 period. The improved results for the 2001 quarter are
primarily due to an increase in merchant trading results in 2001 compared to
2000.
The increase in other revenues in the first quarter of 2001 compared to the
same period in 2000 is due to an increase in merchant energy trading results
from expansion of the trading business, higher energy prices, warmer weather and
the addition of the Torrens Island generation station (Optima Energy Pty) in May
2000. The
24
decrease in electricity revenues for the first quarter of 2001 compared to the
same period in 2000 reflects a $14 million effect of the increase in the US
dollar to Australian dollar exchange rate.
Comprehensive Income
- --------------------
The losses from currency translation adjustments for both periods reflect the
substantial movement in exchange rates between the US dollar and the UK pound
sterling and the Australian dollar. The unrealized holding gains (losses) on
investments are primarily related to market changes in the value of investments
held by TXU Europe and TXU.
The implementation of Statement of Financial Accounting Standards (SFAS) No.
133 "Accounting for Derivative Instruments and Hedging Activities" resulted in a
cumulative effect reduction of $132 million net of tax in Other Comprehensive
Income (OCI) as of January 1, 2001. During the quarter ended March 31, 2001 the
change in fair value of cash-flow hedges was a reduction of $42 million after
tax while $6 million after tax of the deferred amount was recognized in
earnings. See Note 2 to Financial Statements for additional information.
The implementation of SFAS No. 133 has had minimal effect on TXU's results of
operations. The merchant energy trading businesses in the US, Europe and
Australia use mark-to-market accounting for their trading activities. Merchant
energy trading transactions which are derivatives pursuant to SFAS No. 133 also
are required to be accounted for using mark-to-market accounting. Therefore
SFAS No. 133 has not affected merchant energy operating results.
TXU has historically used, and will continue to use, other derivatives which
are highly effective in offsetting future cash flow volatility in interest
rates, currency exchange rates and energy commodities, essentially converting
variable arrangements to fixed arrangements. The fair value of derivatives that
are effective as cash-flow hedges are recorded as derivative assets or
liabilities with an offset in OCI. Accordingly, the principal impact of SFAS
No. 133 has been on the balance sheet.
The balance sheet value of these derivative assets or liabilities can change
significantly from quarter to quarter based on changes in market expectations of
economic events, such as the recent drop in US interest rates and changes in
actual and expected natural gas and electricity prices. The fair value of these
cash-flow hedge derivatives is determined each quarter based on actual and
forecasted interest rates, currency rates and commodity prices. Consistent with
the above, the effect of changes in fair value is reflected in the derivative
asset or liability and in OCI.
The amounts included within OCI reflect the value of the cash-flow hedges
based on current market conditions and therefore the amount for which the hedge
will be used in the future to offset the impact of expected changes in variable
prices. Consistent with hedge accounting prior to SFAS No. 133, the effects of
the hedged transaction will be recorded in the statement of income as the
related transaction is actually settled.
The disclosure in Note 2 to the Financial Statements of the amount of
derivative gains and losses "expected to be reclassified into earnings during
the next twelve months" represents the projected value of the hedge over the
next twelve months relative to what would be recorded had the hedge transaction
not been entered into. The amount is not a forecasted loss incremental to
normal operations, but rather it demonstrates the extent to which volatility in
earnings (which would otherwise exist) is mitigated through the presence of
cash-flow hedges.
Credit Risk
- -----------
See Note 11 to Financial Statements for information on credit risk.
25
FINANCIAL CONDITION
Liquidity and Capital Resources
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU's 2000 Form 10-K. No significant changes or events that might
affect the financial condition of TXU have occurred subsequent to year-end other
than as disclosed herein.
Cash Flows -- Cash flows provided by operating activities before changes in
operating assets and liabilities for the three months ended March 31, 2001 were
$669 million compared with $483 million for the comparable period in 2000.
Changes in operating assets and liabilities for the three months ended March 31,
2001 used $311 million compared with $154 million provided in the same period of
2000. Principal items affecting changes in operating assets and liabilities
were increases in under-recovered fuel revenues since December 31, 2000 of $97,
the return of $270 million margin deposits to the US Energy segment and overall
timing difference between accounts receivable and payable.
Cash flows used in investing activities for the three months ended March 31,
2001 were $476 million compared to $74 million provided in the 2000 period. The
2000 period benefited from the receipt of net proceeds from the sale of assets
totaling $382 million. Cash of $217 million was used in the first quarter of
2001 for acquisitions, primarily Kiel AG at TXU Europe. Capital expenditures
were $319 million for the current three-month period compared with $277 million
for the comparable period in 2000.
On January 8, 2001, TXU Europe completed the acquisition of 51% of Kiel AG,
for (Pounds)145 million ($217 million). The results of operations of Kiel AG
are reflected in the consolidated financial statements from the January 8, 2001
acquisition date.
In January 2001, TXU Europe entered into a commitment to sell its 19.2%
interest in Hidroelectrica del Cantabrico, SA (Hidrocantabrico). On April 20,
2001, TXU Europe received net proceeds of (Euros) 522 million ($468 million).
In February 2001, TXU Europe finalized the sale of its interest in the North
Sea gas fields for (Pounds)138 million ($196 million) as a result of its ongoing
review of its program to reposition its energy portfolio. TXU Europe received
net cash proceeds of approximately (Pounds)97 million ($141 million).
TXU will pursue potential investment opportunities from time to time when it
concludes that such investments are consistent with its business strategies and
will dispose of nonstrategic assets to allow redeployment of resources into
faster growing opportunities in an effort to enhance the long-term return to its
shareholders.
TXU or its predecessor have declared common stock dividends payable in cash
in each year since incorporation in 1945. TXU paid a quarterly dividend of
$0.60 a share in April 2001. The Board of Directors of TXU, at its May 2001
meeting, declared a quarterly dividend of $0.60 a share, payable July 2, 2001 to
shareholders of record on June 8, 2001. Future dividends may vary depending
upon TXU's profit levels and capital requirements as well as financial and other
conditions existing at the time.
TXU anticipates that, in connection with the business separation plan
required by legislation passed in 1999 to restructure the electric utility
industry in Texas, its subsidiaries will refinance certain outstanding
securities in the capital markets in order to properly capitalize the separated
businesses.
At March 31, 2001, TXU had two equity purchase agreements with
separate financial institutions to purchase shares of TXU's common stock. The
timing and amount of these purchases are made at the direction
26
of management. The repurchase price is the weighted average price per share the
financial institutions paid plus commissions and interest less dividends. The
contracts are recorded at the maximum cash settlement amount required to
physically settle the contracts of $146 million at March 31, 2001. On April 16,
2001, TXU purchased 1,252,500 shares of its common stock for $44 million by
partially settling one of the equity purchase agreements. TXU expects to close
these contracts without purchasing shares in 2001.
External funds of a permanent or long-term nature are obtained through the
issuance of common stock, preference and preferred stock, trust securities and
long-term debt by TXU and subsidiaries. The capitalization ratios of TXU at
March 31, 2001 consisted of approximately 61% long-term debt, 6% preferred
securities of subsidiary trusts, 2% preference and preferred stock, 1% common
stock repurchasable under equity forward contracts and 30% common stock equity.
Restricted cash of $988 million pledged against TXU Europe lease obligations is
included in other investments. Applying the cash pledged against related lease
obligations, the capitalization ratios consisted of 59% long-term debt, 6%
preferred securities of subsidiary trusts, 2% preference and preferred stock, 1%
common stock repurchasable under equity forward contracts and 32% common stock
equity.
Issuances and Retirements -- During the three months ended March 31, 2001,
TXU issued, redeemed, reacquired or made scheduled principal payments on
preference stock, long-term debt and trust securities, as follows:
Issuances Retirements
--------- -----------
TXU Corp:
Long-term debt............................. $-- $ 39
TXU Electric:
Long-term debt............................. -- 31
TXU Europe:
Revolving Credit Facility (Tranche B)...... 49 6
Long-term debt............................. 10 540
All Other Subsidiaries........................... -- 5
--- ----
Total..................................... $59 $621
=== ====
At March 31, 2001, TXU, TXU Electric and TXU Gas had no borrowings
outstanding under the US Credit Agreements described in Note 4 of TXU's 2000
Form 10-K. Letters of credit outstanding under the agreements were $358 million
as of March 31, 2001. The US Credit Agreements primarily support commercial
paper borrowings. At March 31, 2001, outstanding commercial paper borrowings
supported by both facilities totaled $1.9 billion.
Financing Arrangements TXU, TXU Electric, TXU Gas and other subsidiaries of
TXU may issue additional debt and equity securities as needed, including the
possible future sale: (i) by TXU Electric of up to $25 million of Cumulative
Preferred Stock and an aggregate of $924 million of cumulative preferred stock,
first mortgage bonds, debt securities and/or preferred securities of subsidiary
trusts, and (ii) by TXU Gas of up to $400 million of debt securities and/or
preferred securities of subsidiary trusts, all of which are currently registered
with the Securities and Exchange Commission for offering pursuant to Rule 415
under the Securities Act of 1933. In addition, TXU may issue up to $340 million
of debt securities and up to an aggregate of $335 million of debt securities,
preference stock, and/or preferred securities of subsidiary trusts, all of which
are currently registered with the SEC for offering pursuant to Rule 415 under
the Securities Act of 1933.
No other substantive changes to financing arrangements have occurred
subsequent to December 31, 2000 except as described in Note 3 to Financial
Statements. See Notes 3, 4, 5 and 6 to Financial Statements for further details
concerning financing and capitalization.
27
REGULATION AND RATES
UK -- New Electricity Trading Arrangements (NETA) -- NETA was implemented in
the UK on March 27, 2001, replacing the Pooling and Settlement Agreement (the
Pool) arrangements for wholesale electricity trading in England and Wales. NETA
provides those companies wishing to buy and sell electricity the freedom to
enter into directly negotiated contracts instead of having to trade through the
Pool. Under the new arrangements, bulk electricity is traded through a variety
of bilateral and physical contracts. Market participants include not only
generators and suppliers but also traders, such as energy wholesalers, with
physical positions. Accordingly, implementation of NETA has eliminated the
Pool. The new arrangements provide mechanisms for near real-time clearing and
settlement of differences between contractual and physical positions of those
buying, selling, producing and consuming electricity. A balancing mechanism
enables the system operator (National Grid Company) to change levels of
generation and demand to near real-time; and a mechanism for imbalance
settlement provides for the settling of the differences between net physical and
net contractual position of parties. TXU Europe is currently evaluating what
impact the implementation of NETA will have on its financial position, results
of operations or cash flows.
Australia -- TXU Australia is subject to regulation by the Office of the
Regulator General (ORG). On September 21, 2000, the ORG published its final
decision in the 2001 Electricity Distribution Price Review. The decision will
cause TXU Australia's electricity distribution revenue for 2001 to be
approximately A$16 million ($9 million) lower than for 2000. TXU Australia
appealed the decision to the ORG Appeal Panel on October 2, 2000. The price
path for TXU Australia's electricity distribution tariffs effective from January
1, 2001 until at least December 31, 2005 was redetermined on December 1, 2000.
TXU Australia has challenged the decision and the redetermination in the
Victorian Supreme Court. The appeal was heard during March and April 2001. The
Judge has reserved his decision.
Retail prices for customers whose usage is above 160 MWh/year are subject to
competitive forces and are not regulated. Customers who use 40 MWh/year or more
have been able to choose their retailer since January 1, 2001. The government
has the power to regulate retail prices for electricity customers with a usage
below 160 MWh/year until 2003.
The distribution tariffs applicable to TXU Australia's gas distribution
network are effective until December 31, 2002, at which time a price review
process will occur prior to new tariffs being approved by the ORG for the next
five-year period. After the next period, prices will be set for periods
nominated by TXU Australia and approved by ORG.
Gas retail customers with loads above 460,000 Mcf/year are currently subject
to competition. Customers with loads between 4,600 Mcf/year and 460,000
Mcf/year will be able to choose their retailers after September 1, 2001 and,
the remaining customers at a date yet to be confirmed, currently expected to be
May 1, 2002.
Although TXU cannot predict future regulatory or legislative actions or any
changes in economic and securities market conditions, no changes are expected in
trends or commitments, other than those discussed in the 2000 Form 10-K and this
Form 10-Q, which might significantly alter its financial position, results of
operations or cash flows. See Note 7 to the Financial Statements for discussion
of rates and regulation related to US Electric Segment.
28
CHANGES IN ACCOUNTING STANDARDS
Changes in Accounting Standards -- See Note 2 to Financial Statements for
discussion of changes in accounting standards.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Although TXU believes that in making such statement its
expectations are based on reasonable assumptions, any such statement involves
uncertainties and is qualified in its entirety by reference to factors contained
in the Forward-Looking Statements section of Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations in TXU's 2000
Form 10-K, as well as general industry trends; implementation of the Texas
electricity deregulation legislation and other legislation; power costs and
availability; changes in business strategy, development plans or vendor
relationships; availability of qualified personnel; changes in, or the failure
or inability to comply with, governmental regulations, including, without
limitation, environmental regulations; changes in tax laws; and access to
adequate transmission facilities to meet changing demands, among others, that
could cause the actual results of TXU to differ materially from those projected
in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU undertakes no obligation to update any forward-
looking statement to reflect events or circumstances after the date on which
such statement is made or to reflect the occurrence of unanticipated events.
New factors emerge from time to time and it is not possible for TXU to predict
all of such factors, nor can it assess the impact of each such factor or the
extent to which any factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder is not significantly different from the
information set forth in Item 7A. Quantitative and Qualitative Disclosures
About Market Risk included in TXU's 2000 Form 10-K and is therefore not
presented herein.
29
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Legal Proceedings -- UK -- In February 1997, the official government
representative of pensioners (Pensions Ombudsman) made a final determination
against the National Grid Company plc (National Grid) and its group trustees
with respect to complaints by two pensioners in National Grid's section of the
Electricity Supply Pension Scheme (ESPS). The determination related to the use
of the pension fund surplus resulting from the March 31, 1992 actuarial
valuation of the National Grid section to meet certain costs arising from the
payment of pensions on early retirement upon reorganization or downsizing. This
determination was set aside by the High Court on June 10, 1997, and the
arrangements made by National Grid and its group trustees in dealing with the
surplus were confirmed. The two pensioners appealed this decision to the Court
of Appeal, and judgment was received. The judgment endorsed the Pensions
Ombudsman's determination that the corporation was not entitled to unilaterally
deal with any surplus. National Grid appealed the decision to the House of Lords
and, on April 4, 2001, the appeal was allowed. The House of Lords found that
National Grid was entitled to use the surplus funds as they had done. As a
result of the decision of the House of Lords, TXU Europe considers that the
likelihood of a claim of this nature being made against it is remote.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of Part II are:
15 Letter from independent accountants as to unaudited interim
financial information
99 Condensed Statements of Consolidated Income -- Twelve Months
Ended March 31, 2001 and 2000.
(b) Reports on Form 8-K filed since December 31, 2000:
Date of Report Item Reported
-------------- -------------
April 27, 2001 Other items
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU CORP.
By /s/ Biggs C. Porter
--------------------
Biggs C. Porter
Controller and Principal
Accounting Officer
Date: May 11, 2001
31